Accountants protect against money laundering amid Russia’s invasion
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Accountants protect against money laundering amid Russia’s invasion

5 months ago · 6 min read

Russia’s invasion of Ukraine is challenging professionals who guard against money laundering and sanctions evasion.

Enabling compliance with anti-money-laundering regulations and economic sanctions is an important role for accountants — one that has become more challenging in recent months.

Russia’s invasion of Ukraine has added complexity that accountants are working hard to solve. Compliance with sanctions on Russia is complicated because it can be difficult to trace relationships and transactions that are associated with businesses and individuals based in Russia.

“Accountants who assist their clients with money laundering and sanctions compliance issues — which requires knowing who your customer is — are ‘barking loudly’ to warn of the risk of not maintaining a heightened level of vigilance in the current risk landscape,” said Jonathan Marks, CPA/CFF/CITP, CGMA, a partner at Baker Tilly who leads the firm’s global fraud and forensic investigations and compliance practice.

The Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog, described the risks related to the war in Ukraine in a public statement. The FATF expressed grave concern about the invasion’s impact on the risk in the money laundering and terrorist financing environment, as well as the integrity of the financial system.

Emerging risks identified by the FATF included the potential for virtual assets and cryptoassets to be used to launder money and the potential for malicious cyber activity that could undermine financial integrity and stability.

Meanwhile, the U.S. Department of the Treasury National Strategy for Combating Terrorist and Other Illicit Financing , issued in May, cited Russia’s invasion of Ukraine and the resulting international sanctions as a change to the illicit finance risk environment.

The Treasury document states that Russian elites, oligarchs and their proxies are seeking to anonymize and hide bank accounts, real estate, gold and other assets in an attempt to evade financial sanctions so they can continue to fund, support and benefit from Russia’s military aggression.

“Illicit finance is a major national security threat, and nowhere is that more apparent than in Russia’s war against Ukraine, supported by decades of corruption by Russian elites,” Assistant Secretary of the Treasury for Terrorist Financing and Financial Crimes Elizabeth Rosenberg said in a news release. “We need to close loopholes, work efficiently with international partners, and leverage new technologies to tackle the risks.”

Accounting professionals’ role

Money laundering is the process by which bad actors convert fraudulently gained assets to proceeds that appear to be legitimate. Money laundering is carried out through many different methods, one of which is to funnel inflated amounts of criminally obtained funds through an otherwise legal business.

For example, a Russian oligarch may use intermediaries to create a shell company that exists solely for the transfer of ill-gotten assets. The shell company can then invest in a yacht worth hundreds of millions of dollars that the oligarch can use and ultimately sell. When the yacht is sold to a legitimate buyer, the ill-gotten proceeds will have transferred from Russia into the international banking system to be spent or invested without fear of authorities’ suspicion.

Throughout the world, governments have enacted laws that combat money laundering — many of which require businesses and especially financial institutions to implement processes and internal controls that monitor and scrutinize whom a business is transacting with. The objective is for businesses and especially financial institutions to really get to know their customers and their customers’ trends and tendencies so they don’t unwittingly help criminals turn “dirty” money into “clean” money.

Although the banking, capital markets, insurance, gaming and automobile industries are the most common targets of money laundering schemes, other businesses can be affected as well.

“The regulation around [anti-money laundering] for financial institutions is much more complex and stringent compared to what industrial companies or other types of companies need to comply with,” said Cecilia Locati, FCMA, CGMA, a risk and compliance director and founder of Internal Control Toolbox in Vienna, Austria. “However, there are also some requirements for companies in other industries. Basically these come back to, do your due diligence properly.”

Accounting professionals with anti-money laundering roles include:

  • Accountants who work in many capacities for financial services companies.

  • Tax professionals who may prepare forms that report large transactions or cash payments.

  • Internal auditors who examine processes and controls to make sure their organization is complying with regulations and following best practices.

  • Forensic accountants who work for regulators and law enforcement to build cases against individuals who are laundering funds.

  • Financial statement auditors, who are unlikely to spot money laundering activities in the financial statements but are required to understand the entities they audit and consider whether a client is committing illegal acts that affect the financial statements.

The Chartered Institute of Management Accountants (CIMA) is responsible for supervising compliance with anti-money laundering regulations by members in practice (CIMA members who provide accounting services to the public) under U.K. law. All members in practice undertake tocomply with the current U.K. law on money laundering and counterterrorist financing (or equivalent if practicing outside the United Kingdom) and submit an annual anti-money laundering return as part of their application and renewal process. The return helps identify potentially high-risk practices, who will be subject to follow-up by the CIMA Professional Standards Team, which may include an inspection visit. Noncompliers may be fined, suspended from public practice or referred for further action under CIMA’s disciplinary processes or by other U.K. AML authorities.

At the same time, CIMA supports members in practice in complying with their obligations by publishing a wide range of guidance about anti-money laundering and providing direct support with compliance. CIMA also plays a strong role in the work to reduce economic crime through public and private partnerships. CIMA co-chairs the Accountancy AML Supervisors’ Group (AASG) of the Anti Money Laundering Supervisors Forum, which represents the voice of the U.K. accountancy profession on money laundering and terrorist financing matters. In addition, CIMA is a member of Accountancy Europe’s Anti Money Laundering Working Party, which allows for strong links to European Union policy and decision-makers.

“Working in this profession really does allow accounting professionals to provide critical validation that a current rule, regulation or business process is operating in a strong control environment and culture,” Marks said. “Additionally, when there are changes or deviations from the current process, we identify weaknesses or breakdowns.”

A key component of anti-money laundering is what’s known as “know your customer,” the process by which companies verify their customers’ identities and screen them for potentially fraudulent behavior. Sanctions compliance also requires knowing your customer.

In global markets, that transparency is becoming more difficult to achieve. Individuals and companies with ties to Russia that may be subject to sanctions may be trying to hide those connections. A Russian oligarch who is sanctioned may act to scrub his name from beneficial ownership documents of any companies he owns, making his relationship with the businesses difficult to detect.

“We find that the information is not there anymore or it's out of date,” Locati said. “It's difficult to find, and this can jeopardize the tracing that is fundamental not only for sanction compliance, but also for anti-money laundering.”

To become better educated about the latest money laundering techniques, accounting professionals study enforcement actions and keep current with the latest guidance and trends. Accountants in the United States also query lists published by the U.S. Office of Foreign Assets Control that identify individuals and companies targeted by sanctions, as well as businesses or individuals designated as terrorists or narcotics traffickers.

Accounting professionals also work to protect the public in this environment by watching for red flags and investigating them, when appropriate. The U.S. Financial Crimes Enforcement Network (FinCEN) issued an alert in March advising financial institutions to watch for red flags that can assist in identifying attempts to evade sanctions against Russia.

FinCEN’s examples of red flags included:

  • Use of corporate vehicles to obscure ownership, source of funds, or countries involved in a transaction.

  • Use of shell companies to conduct international wire transfers.

  • Use of third parties to shield the identity of sanctioned persons seeking to hide the origin or ownership of funds.

  • Accounts in jurisdictions or financial institutions experiencing a sudden rise in value.

  • Jurisdictions previously associated with Russian financial flows that have a recent increase in new company formations.

  • Newly established accounts that attempt to send or receive funds from a sanctioned institution.

  • Non-routine foreign exchange transactions that may indirectly involve sanctioned Russian financial institutions.

Accountants who detect these red flags may need to conduct a more in-depth review, and if appropriate, an investigation. Sometimes this means wading through multiple layers of a transaction.

“You talk about know your customer, now it’s even deeper than that,” Marks said. “You have to know your customer’s customer.”

Marks, who trains boards and senior executives on anti-money laundering and antifraud techniques, said he gets great satisfaction out of communicating simple strategies that can be used to thwart illicit activities.

Locati has found satisfaction in various antifraud roles throughout her career because she is helping the public with her efforts to prevent and investigate fraud. But she also has found it sobering.

Although some cases involve truly nefarious criminals, many times the fraud is perpetrated by individuals whose circumstances push them to cross the line. Maybe the perpetrator’s company has fallen on hard times and justifies accepting funds from sanctioned individuals to avoid bankruptcy. Maybe the bank employee is under high pressure to increase the number of accounts and ignores red flags that make a customer’s deposits suspicious.

Whatever the case, Locati finds that it’s important for accountants and fraud specialists to understand human behavior so they can identify the pressure, opportunity and rationalization that typically accompany money laundering and fraud.

“You really need to be extremely aware and extremely thoughtful about the … steps that lead to fraud,” she said.

Marks added: “The biggest tool that anyone could ever have today is knowledge. If you don’t have people that understand the business objectives and the corresponding risks to achieving them, go find them. Applying traditional approaches in today’s environment is simply not good enough. There are qualified professionals out there that can help.”

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